Sterling Gets Boost as Outlook for Manufacturing Improves

The Purchasing Managers Index (PMI) measuring manufacturing output in the UK has risen in October, coming in above expectation and further dampening the prospect of additional quantitative easing (QE).

The index measured an encouraging 54.9 (with 50 marking expansion in the industry), some way north of the consensus market expectation, which had forecast a modest monthly fall to 53.2. Following on from last week’s impressive 0.8% third quarter economic growth, this data should be sufficient to prevent the Bank of England (BoE) adjusting monetary policy this month. Consequently sterling has enjoyed a slight boost across the board, taking it to 1.15 against the euro.

Duncan Higgins, senior analyst at Caxton FX, said: “The data is certainly an encouraging sign for the fourth quarter with the pace of growth in manufacturing output accelerating in October. As a forward looking indicator this shows that sector growth is lending support to the recovery heading into year-end.”

Higgins continued: “The likelihood of the Bank of England extending quantitative easing is diminishing. Although equivalent data from both the services and construction industries is yet to be released, any suggestions of QE will already have been dulled following last week’s GDP figure.”

The pound’s fortunes have recently been dictated by the threat of additional monetary stimulus and, with this subsiding, the pound has been given a boost across the board.

Higgins added: “It’s looking increasingly unlikely that Adam Posen will find any supporters this week, with the UK economic picture now showing some more positive signs. This is encouraging news for sterling, where the short-term downside risks against the euro are beginning to fade. Looking ahead we feel that the pound’s steady improvement is set to continue and we could now see sterling knocking on €1.16 in the near term.”


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